How Guaranty Funds Protect Consumers

With all the turmoil in the financial services sector, consumers might ask what would happen if the company holding their car, homeowners or life insurance policy or annuity fails.

Insurance companies do fail sometimes, but there are safety nets in place to protect individual policyholders.

First, state regulators are charged with guarding companies' financial solvency, and can step in to take over a company that is in danger of failing. When regulators get involved, they can oversee the company's turnaround, including selling it to a financially stronger company. They can also order it into liquidation, or run-off.

If a company enters liquidation, the regulators in charge make sure the policyholders are paid first before any other creditors. If the company does not have enough money to pay all of its claims, regulators turn to the state guaranty funds to make up the difference. Every state has a guaranty fund to cover auto, homeowners and workers' compensation claims and another fund for life and health insurance claims. All insurance companies that do business in the state pay into the funds, so regulators have a pool of money to use when necessary.

Since 1976, about 600 companies that write car, homeowners, workers' compensation and other property/casualty lines have gone insolvent. The guaranty funds have paid about $21 billion to cover claims from those companies. On the property/casualty side, generally, state statute assigns guaranty funds the responsibility of paying claims for insureds residing in their states. The exception to this is workers' compensation coverage. Those claims are handled by the state of residence of the employee (not the employer, who bought the policy). Some states have separate guaranty funds for workers' compensation claims.


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